Tuesday, 19 December 2017

The political consequences of Brexit Transition

Jacob Rees-Mogg is
apparently the bookies favourite to succeed Theresa May. It is the
same Rees-Mogg who has declared the UK would become a vassal state if
we accepted a transition period under the terms on offer from the EU:
staying in the Customs Union & Single Market (CU&SM) and
accepting all the rules therein (the
full Acquis, to use the technical term). I think
the vassal state remark means he does not like the idea.

In one sense this is
all rather silly. As with the first stage agreement, the Brexiters
will march Theresa May up the hill only for May to march them back
down again as the reality of the UK’s position becomes clear. As
ever, the logic of Article 50 means that the EU can dictate terms.
The Brexiters probably understand this, but they have an eye on who
will replace May so they have to play the game: Johnson played
catch-up on the vassal state meme pretty quickly.

There is a deeper and much more serious concern about the transition phase. A much simpler and logical
alternative
to a transition period would be to extend Article 50 until
the outlines of any future trade arrangements were clear. It is the
Brexiters who will have none of this. The transition phase is itself
a creation of the Brexiters, and their fear that parliament or voters
will change their mind about leaving the EU. What this amounts to is another piece of deception, or perhaps self-deception. The UK is being forced to leave without being told anything about the final deal, including whether freedom of movement will be curtailed in any way.

It is a deception because the nature of the final deal is in reality already clear. I last wrote about the Brexit
negotiations in the days before a first stage agreement was
finalised, but I still wrote:

“Having signed up to staying in CU&SM as a default, the EU has
zero interest in concluding any other kind of agreement, particularly
as it will not safeguard the border. It will just be a matter of time
before the arrangement whereby we stay in the CU&SM is
formalised.”

I was a little
nervous about writing that, but I was relieved to see that other
economic realists reached similar conclusions. (Economic realists is a term due
to Alasdair Smith, to contrast to the magic realists in the government and elsewhere. See also
Jill Rutter.) This result, whereby we stay in the CU&SM,
apparently goes by the name of BINO: Brexit in name only.

I doubt the
government (by which I mean Davis and May) sees it this way, partly
because they still have faith that the cavalry, ridden by German car
exporters, will come to the rescue at some point, and the larger
economies in the EU will put Irish concerns over the border to one
side. But why should they? The best result for the EU is BINO, and
what the first stage agreement shows is they can get it, because at
the end of the day the UK will fold.

As Rick explains,
the Ireland border constraint may still allow some flexibility as far
as the single market for services (rather than goods) is concerned.
Of course there are good
economic reasons why we would want to stay in the single market for
services. The only point of trying to negotiate not to be from the UK
government’s point of view would be if that allowed some kind of
opt out from freedom of movement.

However, if there
has been one overriding mistake that even the economic realists have
made throughout this process, it is thinking too much about what the
UK’s options are and too little about what the EU will tolerate.
The moment it was clear that the Irish border question was a first
stage issue for the EU, talk of a Canada+ deal should have been
quietly forgotten. Equally the key question now is what tinkering
with the single market, if any, the EU will allow and whether
anything will buy flexibility on freedom of movement.

In an ideal world, I
would agree with Jean Pisani-Ferry who writes
that it should. Once the Eurozone was formed, the EU should have
thought more seriously about a two-speed EU or whatever you want to
call it. Besides the UK, both Sweden and Denmark do not wish to give
up an independent currency, and Norway, Iceland and Switzerland have
very close relationships with the EU. Unfortunately, however, I
suspect what will drive what the EU will tolerate with Brexit is the
need to remove any temptation for any member to exit. So rather than
thinking about what options the UK could go for, it makes more sense
to think of final arrangements that everyone in the EU can agree
leaves the UK at a disadvantage compared to being a member.

Would an arrangement which involved being partially in the single market and ignoring free movement be such a relationship? This must be questionable, because so many in the EU see free movement as integral to the single market. Although being out of the single market for services would be a big economic cost to the UK, so is restricting EU immigration. What matters are political costs, and such a deal looks too much like the UK gaining something significant by leaving.

In contrast BINO is a relationship the EU would be happy with, because following EU rules but having no say in those
rules would appear obviously worse to any politician than being a
member. It will certainly appear that way to any Brexiter. If
Rees-Mogg calls the UK under a BINO transition a vassal state, what
is he and others likely to think of a permanent agreement along these
lines? It would be the ultimate humiliation for Brexiters.

What can they do
about it? They could go for the nuclear option, and quickly trigger a
leadership contest. But this close to us leaving the EU, MPs may
persuade May to stay on (for the moment at least), and May might then
win a contest among Conservative MPs, and as a result
there would be no election involving the membership. A safer tactic
for Brexiters is to look towards a leadership contest after we have
actually left the EU i.e. during the transition period. [1] But the
road ahead is full of minor humiliations, like the end of the
‘nothing agreed until everything agreed’ myth.
Who knows what they will be provoked to do, or their backers and right wing press will provoke them to do.

If BINO is the final
destination, this should in an ideal world give Remainers a very
strong weapon. As David Allen Green suggests,
they can constantly ask what is the point of this Brexit? But we are
very far from an ideal world. Besides Remainers, the group that
should see most clearly that BINO is obviously inferior to remaining
in the EU are MPs, [2] but they are still bound by the will of the
people. What they should do is vote to extend Article 50 until the nature of the final deal is clear, but while this can still be portrayed as frustrating Brexit they will not. Not enough of the public will change their minds because
the government and the media, with the usual exceptions, will do all they can to obscure BINO as the ultimate destination, and the transition period will help the government to keep its magic realism going.

[1] I have
previously assumed that May would not be allowed to fight the next
election. But if the logic I describe above still holds in 2022, she
might yet. It will mean I underestimated
the Conservative zugzwang.

[2] Just as a single politically binding referendum was absurd because it allowed a vote to leave without knowing the destination, so giving MPs a final say on the deal before we leave in 2019 is pointless because the government will not make clear the nature of the final deal.

18 comments:

Here's a funny thing: if you trade with Switzerland you will find that they have different regulations from the EU. Yet the last time I was there, I took a taxi into France for dinner, past an un-manned 'border post' half-way down the road.In Ireland, it seems that a 'hard border' is required at the EU boundary. Curious.

If May delivers a hard brexit the Tories will lose many voters at the next election. Zugzwang is definitely the word to describe it. Soft or no Brexit is politically unpalatable to their base, and hard Brexit is economically ruinous for many of their weaker voters.

I hope for the economy’s sake you’re right, but I fear that the most likely outcome is something like a Canada deal with bits and pieces tacked on - on the hardish end of Brexit. The role of the press in this scenario is simply to blame the EU for not agreeing to the ‘cake and eat it’ option being proposed by the government.There is no majority in the UK Parliament for a customs union/single market deal. A lot of Labour MPs have moved away from free movement of people. The leadership doesn’t like the single market. And the number of Conservatives willing to go against the government is small.The EU really believes the UK government when it stated that it wants to leave both the customs union and the single market. They probably also think that the people currently in government in London don’t really care whether there is a hard border in Ireland or not.No Unionist has ever let the Irish tail wag the English dog and they aren’t about to start now. So the Irish border issue will be fudged. There are already some controls between Britain and the island of Ireland on grounds of plant and animal health - Ireland is free of certain diseases and everyone, even Unionists, wants to keep it that way. So some of these controls can be reinforced, in spite of the ‘integrity’ of the UK, and the agreement with the EU allows further divergence between Northern Ireland and GB whenever the Northern Ireland executive decides. The UK remaining in the single market is not the real Norway option - it’s one thing not to lose what you never had (Norway) but quite another to leave the EU and the rights that went with membership but then become subject to it. Brexit is crazy, but that would be worse.The EU might on the surface find the customs union/single market solution easy, but they know the political situation in the UK too well to believe that it is a sustainable solution. So the ‘Canada’ option is more palatable - slightly harder to agree, but more likely to stick.And that means May will stay...

the usual Continuity Remain head-in-the-sand wishful thinking until we get to the paragraph "In an ideal world...". Yes. Quite. But they didn't. And? And? You really need to pursue this point about why the EU didn't and what this tells you about the reality of the EU.

And a small point about that Vassal state bit. Do you think that, with our history of Empire and the problems of legitimacy that come when you run other people's countries, that we would ever now suggest that a foreign country be subject to our laws without any representation from them in that law-making body? We would know this is just a recipe for turmoil and will ultimately lead to the undermining of any authority the imposing government would have in that nation. So why don't you just come out and say that for the EU to consider proposing the UK is subject to laws in which they have no input is totally unreasonable and they should not do it? You can't on the one hand suggest we should stay in the EU as it would be good for us and on the other hand cheer on an autocratic, centralist and intolerant style of government.

It is very difficult to forecast the political consequences of Brexit if one does not understand the current political realities of Brexit.

I don't mean to pick on Simon. No one seems to grasp the political realities. But let's bold the core bad assumption here:

"The transition phase is itself a creation of the Brexiters, and their fear that parliament or voters will change their mind about leaving the EU. What this amounts to is another piece of deception, or perhaps self-deception."

and

"I doubt the government (by which I mean Davis and May) sees [they are headed to SM & CU membership], partly because they still have faith that the cavalry, ridden by German car exporters, will come to the rescue at some point"

Both of these assume Theresa May is acting as an idiot or fool, rather than simply as a mendacious politician. She must be deceiving herself, and must not recognize basic facts that everyone else understands. In short, the assumption is that Theresa May is not being a rational political actor.

Again, I don't mean to pick on Simon. This assumption is widely shared. But let’s note a few poltical facts:

- Theresa May was a Remainer during the referendum.

This seems universally forgotten. And given how May played xenophobic cards against the EU throughout her Home Office career, she likely had strong policy rationales for being against Brexit. (Of course, it is May's political interest for this to be forgotten, and in almost no one's interest for it to be remembered.)

- After the referendum and Cameron's resignation, the Tories picked a Remainer.

Forgotten, and important.

- After her leadership election, Remainer May surrounded herself with Leavers in the cabinet.

A crucial political move, in that it helped everyone forget that she was a Remainer.

----

So, how do we account for May's politics if we think she is a rational political actor? Let's try this on for size:

Since the very beginning, May has been actively pursuing a BEANO settlement for domestic political reasons. She’s a Remainer pretending to be a Leaver. If true, how would she have proceeded politically?

- May should make the electorate believe she is a Leaver.

Mission accomplished. The cabinet. The odd mantra, "Brexit Means Brexit", which has the beauty of being close to meaningless, but in line with BEANO. This avoids a leadership challenge from the Tories.

- May should follow the rhetorical lead of her Leaver cabinet.

This is the part that seems to confuse everyone. Why would May not smack down Johnson & Davies when they say insane things? Because it doesn't matter. No matter what the UK did after the referendum, or what it does going forward, (within reasonable bounds), it has zero effect on the final deal! There is no policy downside in playing politics to the crazy base. The policy results of the UK pursuing a political BEANO are determined by Brussels, not Westminster. Understanding the UK's lack of power should allow folks to understand May's political strategy, but…

- May should exit the EU in 2019 and declare victory.

She will do so. Importantly, "Brexit" will be irreversible. May will be solidly on the path to BEANO, achieving Leave symbolism and Remain substance.

- May should fight a general election in 2020 on the basis of having "achieved Brexit" while not crashing the economy.

Two years from now, Theresa May will still be dissembling about the settlement the UK will eventually receive from the EU. Domestic commentators will still still not realize this is being done on purpose.

(Folks should remember May's record in dealing with the EU as Home secretary. Her template was to fight loudly, and then quietly declare defeat. It's her brand, and there is no reason for her to change it. Also, folks should refer to Tsiprias' political strategy during "Grexit", which May is echoing quite strongly.)

The government will go for no deal rather than BINO. The EU heads of government know this & therefore realise they can't just offer BINO. If the penny doesn't drop with M.Barnier, watch out for his chain being yanked in the foreseeable future. Nothing to do with German car exporters as you rightly say.

Simon, you, the CBI and many other authorities encourage the view that the UK would not be affected if it formally left the EU on 29 March 2019, but agreed to remain inside the Customs Union and Single Market (as well as continuing to pay into the EU Budget, accepting the four freedoms required of the SM and the jurisdiction of the ECJ.) But is it not the case that the moment the UK formally leaves the EU, it ceases to be a party to the many treaties signed by the EU with third countries? Thus, for example, the UK would cease to benefit from the recent Canada-EU trade treaty, the yet-to-be implemented Japan-EU treaty, etc. Exclusion from any one of them would probably make little difference to UK trade, but exclusion from all of them would have important consequences, to say nothing of logistical problems for all concerned. Secondly, would the EU and UK not run up against most-favoured-nation (MFN) objections if the EU continued to extend the substantial benefits of membership of the CU and SM to the UK, while refusing them to third countries? Isn't this precisely what several large countries recently warned the EU against? The MFN principle lies at the heart WTO rules (and makes trade negotiations so fiendishly difficult.) As I understand it, the UK would have to (re-)join the EEA in order to qualify for continued EU trade advantages; and this would involve a further, and by no means simple, round of negotiations.In short, is such a thing as a BINO position after 29.03.19 realistic?

Salient points. If you are correct that would leave the choice between UK EEA membership with continuing SM access and its four freedoms (but EFTA Court rather than EOJ jurisdiction and UK non-membership of Common Agricultural and Fisheries Policies, or an extension to Article 50 UK exit date, or a disorderly (read: most economically damaging)exit.

According to some, (and apparently the May government's current preferred expressed option) is for a Deep and Special Free Trade Agreement somewhat akin to the FTA entered into between the EU, Ukraine, and other eastern european countries that offered the benefits of SM but without FOM.

My knowledge of that arrangement is scanty, but on first glance it was offered as an inducement for such counties to move closer to the EU orbit, in which case it would seem that it could be challenged on MFN grounds.

Some in the Labour Party project that an EEA arrangement with some tweaking of FOM, Fisheries, and to other limited areas, is where the UK will end up and that could be sold as the least economically damaging option that would still honour the brexit vote and its connected primary immigration concerns.

The issue then would be whether de facto UK CU membership would also be be yanked onto UK EEA membership as part of a permanent post-brexit UK-EU deal, rater than a long-term transitional arrangement.

In that regard, it should be noted that EEA membership is not designed as a transitional phase in a journey towards an alternative trading relationship.

Meanwhile it appears that the May cabinet has authorised an approach where the UK will seek from the EU, a transitional deal where the benefits of continuing CU and SM membership are retained, viz: frictionless trade in goods without tariffs and without border customs checks, but with some regulatory divergence in key sectors to the UK interest, as well as, say, exit from the Common Fisheries Policy: the ‘let us have our cake and eat it’ option.

It is almost certain that that this approach will be rejected by the EU next spring; perhaps that will serve to further clarify minds.

The prospect of a de facto five year SM and CU post 2019 transition -at least involving continuing FOM, EOJ jurisdiction, and membership fees, does not appear yet to have been accepted or understood by Labour, at least in public discourse or in policy terms. Perhaps that will change when the fixed parameters of the stage 2 negotiations, as set by the EU, become even more visible by March 2018.

Given that voters rejected full EU membership (the optimum, in your anslysus) it's not clear why BINO wld be viable as the status quo ante. The tectonic plates have shifted, as an eloquent man once said. Short-term tactics are interesting, but the UK is too big to be annexed permanently by Brussels.

Our local MP who is cons. is crowing in Twitter today about the ONS report/chart published this week that said that the UK economy expanded by 1.9% over the course of the last year,rather than its original estimate of 1.8% (GDP growth compared with G7nations. But he is quoting 2016 stats and not 2017 what is the true affects of BREXIT in 2017

BINO means an end to democracy in the UK. Some things matter more than GDP growth rates. If we end up with BINO we lose something worth more than 40 Billion euros, or 400 billion euros, or even 4 trillion euros we lose our future as a democracy. We must deliver a truthful Brexit that leaves the UK on a more independent trajectory for at least two decades. If we are poorer, then so be it. Any reversal of Brexit or any subversion of Brexit will leave the UK broken and dangerous.Accept the result. Make the best of it. If not, you have to accept you are not a democrat.

In what fashion? We voted to not be in the EU, we won't be in the EU. Even during the referendum the question of what, exactly our non-EU membership could look like was conspicuously not mentioned. And why? To perpetuate a deception as to what it would look like. This is the truer threat to our democracy: Shameful lies and deception masquerading as political consensus.

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